Health Care: An Alternate Economic Universe

In July, 2012, the US economy produced roughly the same volume of goods and services as it did five years earlier with five million fewer workers. Yet, during the first four years of the recession (May 2007 to May 2011), the US health system, despite slowing or declining utilization, added 1.149 million workers. Key sectors, specifically hospitals and physician offices, grew their workforces despite declining admissions and office visit volume. (Employment data in this post comes from the Bureau of Labor Statistics’ (BLS) National 4-digit NAICS Industry-Specific Estimates from May 2007 and May 2011.)

Compared to the rest of the economy, health care seems to exist in an alternate economic universe. This would be good news, rather than a problem, if we were not borrowing roughly half of every dollar of general revenue the federal government is spending on health care and if employers were not robbing their workers of wage increases to fund their health benefits.

Hospitals and physician offices saw declines in their core activity in the past few years. Hospital admissions have been flat the past five years, and have shrunk the past two. Even hospital outpatient volume growth has subsided into the low single digits, only partially offsetting the lost admissions. Yet hospital employment rose by over 220,000 workers, or 4.4 percent from mid-2007 to mid-2011.

The fastest growing hospital job occupations: “management” (roughly 14 percent); business and financial operations (roughly 12 percent); and “computer and mathematical” (roughly 18 percent). Clerical employment actually declined, suggesting a shift to automated business operations (and a more complex, higher salaried workforce). If there has been productivity leverage from hospitals’ markedly higher investment in clinical information technology, it is difficult to discern. Laying off clerks and coders, and replacing them with software engineers and managers is not a big economic win.
The largest numerical increase in the hospital workforce, however, was in the category of “healthcare practitioners and technical occupations,” at 193,000 new workers (roughly a 7 percent increase). Hospitals employed 18,000 more physicians, as well as more nurses (117,000), technicians and technologists (almost 35,000) and therapists (12,000) — all on declining core volume. Whether this increasingly intense clinical staffing is paying off in improved patient safety or better coordinated remains to be determined.

An Imbalance Between Supply And Demand In The Physician Sector

The physician sector is where the greatest disjunction between demand (falling) and employment (rising) exists. Physician office visit volume in the US leveled off in 2005, and has declined by roughly 10 percent since mid 2009, according to IMS Health. Despite these declines in activity, physician offices added 165,000 workers, of which half were professionals. Again, the most rapidly growing job category was “management”, but physician offices added 47,000 nursing and clinical support workers (technologists, therapists, etc.).

One suspects that a large number of these folks were helping physicians meet the documentation requirements to qualify for “meaningful use” payments for installing electronic health records, responding to the Physician Quality Reporting Initiative mandated by the Affordable Care Act, and responding to ever more requirements for prior authorization from private health plans. Whether measureable benefits accrue to the society commensurate with these added personnel costs also remains to be determined. A “zero-based” budget type review of the costs vs. benefits of physician documentation requirements imposed both by federal mandates and private payers is long overdue.

Not coincidentally, an epic flight from private medical practice into hospital employment is underway in earnest. If deficit reduction takes hold in the next two years, physician shelter in the hospital will be temporary, as employed physicians are costing hospitals more than $200,000 a year, according to a recent analysis by the Medical Group Management Association.

Surprising Data From Less Closely Tracked Areas Of Health Care

However, the biggest surprise in the BLS employment data was that two thirds of health care’s employment growth from 2007-2011 was in the less closely tracked worlds of subacute, chronic and home based health care. Home health care employment, the fastest growing sector, grew by almost 220,000 workers, an astonishing 24 percent increase in just four years.

Outpatient care centers (freestanding imaging, surgical, physical therapy, dialysis, etc.) added 106,000 workers, a 21 percent increase. “Community care facilities for the elderly” — such as assisted living facilities — added almost 108,000 workers, a near 17 percent increase. And “Offices of Other Health Practitioners” — physical therapists, chiropractors, podiatrists, etc. — added almost 100,000 new workers, more than a 16 percent increase.
These growth areas have several common elements: fee-based payments, a substantial direct pay/patient pay component, and less utilization management attention than the big ticket/big iron parts of the care system. That this growth took place during the worst recession in the US in the post-World War II period, and a major contraction in household income and consumer debt crisis, makes it all the more remarkable.

More Evidence Of The Need For Bundled Payments And Global Fees

Whatever else you can say about US health care’s employment surge, this is a very successful economic activity, larger by itself than the gross domestic product (GDP) of France. But the robust employment growth begs multiple questions, such as, can you contain health spending meaningfully by focusing narrowly on the traditional categories of hospital and physician services?

This employment trend data would suggest the answer is “no”, giving fresh urgency to payment models that bundle all services provided to patients incident to solving a clinical problem into a single payment, or which provide comprehensive services to a population for a global fee (dare we say, “capitation”).

This growth in employment and service intensity, comes at a time when, as I have discussed earlier, overall health spending in the US is growing at the slowest pace in fifty years. One strongly suspects that the five-year long cost moderation is a demand side phenomenon, e.g. that cost growth has moderated because fewer people can afford the health system’s product.

Health care in the US is changing, and becoming more disciplined, team-based and protocol driven. However, the culture of the US health system has changed yet very little. The primordial impulse is to add more (and more expensive) workers whenever new problems need to be solved or new technologies appear, heedless of the expense.

Hospital executives continue speaking wistfully and inaccurately of “reimbursement” as the source of their revenues. This retro word conveys the distinct subtext that they have no responsibility for the cost of their product, that money has been spent, and someone owes them “reimbursement” for it. The proper term is “payment”, and the operative societal question is “are we receiving value for money?” in that payment.

However, most of the new payment models under intense scrutiny — from accountable care, to bundled payment, to “ambulatory intensive care” for dual eligibles, etc. — only pay off if they markedly reduce, particularly, hospital use. Despite a (slowly) aging population and (hopefully) better access through health reform, the trend line for use of our most expensive health resources will likely turn downward as we reduce avoidable use of our system’s most expensive resources.

An Unsustainable Status Quo

But the cost of health care that remains is still far too high to be affordable long term. Those costs will only be reduced by better coordinated care, and by marked improvements in clinical and organizational productivity, a revolution these data suggest has yet to begin. The supply side of the US health care system remains impressively insulated from cost pressure, and focused on the myriad challenges of growth and revenue enhancement.

At some point on the path to deficit reduction, gravitational forces will assert themselves. Policymakers can assist in that process by re-examining the economic logic of the transactional density and documentation burden they are imposing on caregivers. We will know that economic pressure on the health system has reached a decisive juncture when health sector employment stabilizes or reverses course, and health care providers join the rest of the economy in seeking improved productivity and product quality as necessary strategies to survive.

Jeff Goldsmith is president of Health Futures Inc, which specializes in corporate strategic planning and forecasting future health care trends. He is also the author of “The Long Baby Boom: An Optimistic Vision for a Graying Generation.” This post was originally featured on HealthAffairs Blog.

37 replies »

  1. I know this article is a few years old but after reading it I realize how important telemedicine is to the future of our healthcare industry. I know that it is not the solution for every medical need but I believe it will help with the majority of needs. I do find the stats amazing that there is a decline in office visits and hospital visits when the waiting time seems to be getting longer.

    Anyway, I am excited to see what the future of telemedicine brings.

    Rick @ http://www.livecare247.com

  2. It’s no surprise. With the continuing problem when it comes to the health of America’s baby boomers, the healthcare industry will surely continue to grow, and if you’ll check the data gathered by BLS, it states that in the upcoming years, the industry would be needing more people in the field to perform the needed work around the healthcare system.

  3. Jeff, great post, as usual – data driven, logical, yet thought-provoking…

    Nonetheless, I am having a hard time reconciling the macro-economic figures that you reference from the BLS which, would suggest that supply is outstripping demand, and the ongoing noise about the impending shortfall of physicians and advanced care providers?

    Thanks for your thoughts!

  4. Nope. I’m a sociologist and recovering strategy consultant. Lots of doctor friends, though. Where’s the scam?

  5. Jeff, Bob, Batty oh sorry Barry , jeff, Jack, are you guys doctors? this reads like a scam.

  6. Telemedicine is not only the next level of medical system it will make a great contribution in the field of economy. So, necessary steps should be taken so that patients don’t have to pay extra money for getting the service. The field should be free from those who like to make it a business rather than a form of service.

  7. I believe that only three or four states have passed laws to restrict balance billing in emergencies — California, Illinois, maybe MN and Connecticut.
    The Obama administration did not push this at all, because its goal was to get everyone insured, and to do this they decided to placate the hospitals.

    There is an interesting piece in Seeking Alpha on Beware the Health Care Bubble. The author says that when he hears hospitals talk about perpetual demand, it reminds him of mortgage brokers talking about endlessly rising house prices.

  8. Bob –

    I think care delivered under emergency conditions, which I define as either care delivered in the ER, or as a result of hospital based care delivered in connection with an ER visit that results in an inpatient admission or care delivered as part of observation status, lends itself to special payment rules. Specifically, payment for such care could be limited by law to some reasonable percentage above Medicare – perhaps 125% to 150% of Medicare at most regardless of what the contract rate for non-emergency care might be.

    In the past, the employer mentality regarding health insurance was we want to keep our employees happy and whatever the insurance costs, it costs. More and more employers can’t afford it anymore and are finally starting to embrace tiered networks and narrow networks to mitigate cost growth. As a result, these insurance products are gaining traction in more and more markets. It’s about time.

  9. The tiered network/reference pricing model Bob talks about is the only solution I can think of. There is no reason why ANYONE should pay $3000 for an MR scan when there’s a $600 scan right across the street, read by the same radiologist! And the only way to do it is to give consumer the data, and a share of the responsibility for the five fold increase. It should also apply for cardiac revascularization, cancer treatment, obstetrical deliveries etc. . .

    That’s basically what bundled payments are about. Except that there have to be multiple choices and a fixed contribution beyond which the patient pays. . .

  10. I am no fan of insurance companies, but in one state Aetna rolled out a program for outpatient care that works as follows:

    When an MRI or similar procedure is recommended, on a non-emergency basis, the patient is sent a printout on who is charging what in their geographic area.

    A free-standing doctor will charge less than half of what a hospital charges.

    The patient will have to pay the hospital’s higher fee if they go that direction.

    This is a step in the right direction.

    Of course if hospitals lose their profits from outpatient care, they will try to raise their rates for emergencies.

    Will we have the courage to force hospitals to shrink their budgets? I do not know. Stay tuned.

  11. Margalit and Jeff –

    One potential countervailing strategy is the tiered insurance network. Hospital owned imaging centers should be in a non-preferred tier for outpatient work based on cost (at contract rates) alone. So should doctors who work for hospitals and bill a facility fee on top of their normal charge for services. If there are less expensive decent quality providers available with practices that aren’t owned by hospitals, patients should be steered to them to the maximum extent possible. While we are certainly not yet near where we need to be with respect to price transparency, insurers have made considerable strides in making it easier for members to find out what their co-insurance amounts will be in advance and what alternatives are available to them within the insurance network. It’s not that hard, at least for non-emergency care that needs to be scheduled well in advance anyway.

  12. As the WSJ article clearly shows, the present costs of the consolidation far outweigh any notional savings from better co-ordinated care. What’s really going on in the field is a costly scramble for marketshare, wrapped in BS about “accountability”. The average hospital is losing $212k per FTE employed doc, but making it up by charging $3000 for each new MR scan the employed doc orders from the hospital’s imaging department. Lord save us patients from that type of “accountability”. The “new paradigm” hasn’t arrived yet. . . .

  13. The DRG rates in Europe are about half of ours, as documented by Uwe Reinhardt. If we pay $14,000 for a surgery, they pay $7,000, pretty much across the board.

    Hospitals in Europe. Australia, and Canada also receive funding from general revenue i.e. VAT taxes. The hospitals do not have to live or die on patient volume. They are a little more like fire stations, especially in Canada.

    Many of our hospitals lose money on most admissions but make it up on heart cases, cancer cases, transplants, etc. On a big case they might bill $1 million, settle for $700,000, and make a $500,000 profit. Much of their capital expenditure is to get in position for outlier cases. This is bizarre.

  14. As well, the rules have changed. Certificate of Need programs have been eliminated, permitting hospitals to build wherever and whenever they want. And they now allow hospitals to hire physicians and pay them productivity bonuses (on patient admissions and ordering of expensive tests, whether needed or not).

  15. Margalit –

    Hospitals in most countries, including the U.S., are generally paid on a case rate (DRG) basis and, in some cases, per diem. Sometimes there is a case rate with a carve out for an expensive medical device that is paid for separately. Utilization in Europe is actually higher for low intensity encounters like visits to a PCP and hospital stays that involve a lot of resting and recovery but not much actual treatment.

    As we’ve discussed before, the biggest single factor that accounts for much higher healthcare costs in the U.S. is that we pay higher prices for virtually every service, test, procedure and drug, especially for hospital based care and imaging as well as brand name drugs. We are also likely to do more testing and provide more “heroic” care and aggressive interventions even when they are unlikely to do much good. This is where differences in practice patterns, the litigation environment and patient expectations all converge to drive U.S. healthcare costs even higher than they would otherwise be.

  16. I’ve been in health care for 40 years, and have billed both Medicare and private. The problems are extensive and caused both by greed and fraud. Mostly the differences would be solved with politicians sitting it out, and getting rid of the insurance middleman. Over-ordering because of FFS is real, as is fraud that is not pursued by either the Medicare *OR* private systems. But if you want to fix it, get the political bribes out of if and it is fixed tomorrow. See


  17. Maybe and maybe not, but, FFS being equal, wouldn’t it be wiser to identify the factors that account for almost doubling the %GDP and address those first?

  18. “Barry is correct that we must get rid of the fee-for-service system, which leads to over utilization and excessive costs”

    Why doesn’t fee for service lead to over utilization and excessive costs in Switzerland or France or Germany or whatever?

  19. Barry is correct that we must get rid of the fee-for-service system, which leads to over utilization and excessive costs, but I don’t know what would be better. Perhaps a VA-salaried system, but that leads to “socialized medicine” which turns off the politicians who are funded by their insurance campaign contributors. The truth is, we could provide health care to 100% of Americans and save $400 billion per year by eliminating the 20% of costs necessary to cover the middleman insurers. We’d pay for it through taxes, but we’d pay 20% less.

    Problem is, health care is a small fire fueled by a much larger fire of political corruption. Had we eliminated campaign bribes we’d have fixed health care decades ago. Over $125 million in campaign contributions got us mandated insurance. When will we learn?

  20. Bob –

    While I don’t know about futile care per se, I suspect there is a lot of what I would call marginally useful end of life care which is either unlikely to extend life at all or to extend it a little but with very low quality. Much of this care would probably not even be offered in other developed countries not because of rationing but because of more conservative, and I would argue more sensible, practice patterns. I would also suggest that patients in other countries are more accepting of death when the time comes than Americans are.

    As for hospitals hunger for revenue in order to cover their huge cost structure, I think that needs to be addressed by moving away from the fee for service payment model in favor of bundled payments for expensive surgical procedures and capitation where feasible. As I noted earlier, though, I don’t think most hospital led ACO’s will be capable of taking on the financial risk inherent in capitated payments even if they’re risk adjusted. However, price transparency and disclosure of meaningful quality metrics could make the healthcare market much more competitive than it is now.

  21. I had a lot of experience with Medicare during my father’s illnesses in his last years. The lesson that I took was that very little money was spent on debatably futile care. There were no ventilators, feeding tubes, dialysis at age 90, or questionable surgeries.

    There was a lot of money spent on diagnostic tests, most of which confirmed the fact that he was old and frail and failing, which a first-year intern could have told him with a stethoscope.

    A lot of money was spent housing hiim when he could not go to the bathroom without aid. (VA benefits mainly in this area, but otherwise it would have been Medicaid.)

    I realize as we all do that one cannot make health policy out of anecdotes. On the other hand, my extensive reading makes me believe that my observations may hold broadly.

    In about 2001 a monograph was published that looked in detail at end of life intensive care in our hospitals. (If I can find the cite, I will post it later.)

    Anyways the conclusion was that

    a. most care was not futile when the care began;


    b. even if used an army of Dr Kervorkians and real death panels, the hospitals which now rely on profits from intensive care will have to look elsewhere for revenue.

    For what it is worth, I would differ from Barry in that I have a supply side view of health care costs. American hospitals need over $600 billion a year just to break even, and their necessary search to cover those costs leads to
    rising insurance premiums for the middle class, rising Medicare and Medicaid costs for others, and barbaric collection practices for some of the uninsured.

  22. I think bundled payments for expensive surgical procedures make a lot of sense. However, only hospitals would likely have the management infrastructure to deal with the allocation of the payment among providers including those who are not salaried employees of the hospital system. This approach would obviously be less complex and less contentious if the surgeons and anesthesiologists were salaried employees of the hospital.

    As for ACO’s accepting fully capitated payments, I don’t see them able or willing to take on the financial risk except for large organizations like Kaiser where the providers and the insurer are part of the same organization. The risk scoring state of the art is still far from perfect and the range of possible financial outcomes is probably too wide for most provider organizations to accept.

    My own preference would be to focus more on changing the culture of medical practice. Specifically, in the case of end of life care and expensive cancer treatments, be honest about the prognosis and the quality of life implications of treatment options. Talk to patients and families like they were doctors or nurses but without the scientific language. If there is nothing more than you can do, say so. If a feeding tube or ventilator is an option but the patient is unlikely to ever get any better or be able to interact with others, say so. If a late stage cancer treatment will only buy another few weeks of low quality life, say so. Don’t hold out false hope.

    As for patients, I would find ways to vastly increase the percentage of the population, especially among the elderly, that executes a living will and have the information stored on a registry so it’s available to doctors, hospitals and family members when needed. If it were up to me, I would charge an extra $5 or $10 per month for each Medicare Part B beneficiary that does not have a living will or advance directive.

    Finally, sensible tort reform could reduce defensive medicine and price transparency would make it easier for patients and referring doctors to find the most cost-effective providers for non-emergency care.

    Whether or not we turn Medicare into a premium support model is the wrong debate, in my opinion. Doctors’ decisions drive virtually all healthcare spending. Finding ways to encourage them to practice more cost-effectively and to protect them from non-meritorious lawsuits offer much more promise in bending the medical cost growth curve.

  23. Enforced by OUR Congress? We tried capping Part B Medicare and ended up with a $300 billion “bad mortgage” on the federal balance sheet. Maybe we could “outscource” managing the cap to the Swedish National Assembly.
    We don’t do “caps” here, hard or soft. . .

  24. I think the answer is cover everyone with a global hard cap and let the system fight it out. Looks like the UK got it about right in 1945…

  25. Thanks for the comments.

    Honestly, John, I suspect that even if we absolutely banned all questionable surgeries (back, prostate, carotidectomy, I am not an expert in this),
    our health care costs might still go up.

    There are still so many non-questionable surgeries that will still be performed.
    The hip and knee pains that lead to surgery are real, and the results are generally very good. As for heart and cancer surgeries, we could pay a lot less than we do but I do not see the volume going down.

    As for cost-plus programs……….

    Wnen Medicare was adopted, hospitals were a ‘tin-cup’ industry where most institutions lost money and could not get the latest equipment.

    In the early days of Medicare, we wanted hospitals to get more money.

    That has been very hard to change. One reason is that Medicare is not a line item budget item like National Parks.

    In Canada, hospitals are owned by the government. When budgets have been stressed, the Canadian government has closed facilities and laid people off.

    In America, as Jeff described in his article, hospitals first spend money and then to turn to payors to recover their costs. This will have to change, but at this moment I do not know who is stubborn enough to enact the change.

  26. Great analysis. You’re absolutely correct that we won’t get healthcare costs on a sustainable trajectory until we stop allowing hospital price inflation to pay for reduced productivity.

    Cost-plus thinking may be vestigial, but it still pays off – and the ACA isn’t disruptive enough to change that anytime soon. By the time it does, our costs will have doubled from here – even by the CBO’s projections.

    Since we can’t seem to get our act together on the supply side of healthcare, our best hope is to change the demand dynamics. The current lull in demand is likely to prove temporary, as some of it is deferred maintenance that will cost more to treat later.

    A more lasting demand solution is a better educated patient population able to finally put the “informed” into “Informed Consent”. Once the public understands how much of their medical “care” is padding of their doctors’ bills – often risking harm to them and their loved ones – then the appropriate backlash and resistance to unneeded medical interventions will help realign our demand with actual patient needs rather than providers’ income expectations.

    Deception of patients underlies much of our excess medical costs (defensive medicine, physician self-referral, unneeded surgeries and procedures, etc.) and nobody, after all, likes being ripped off.

  27. That’s exactly right – I can’t believe I’m seeing an accurate assessment in writing. There are just too many people addicted to these processes – and too many professions protecting their turf rather than figuring out how best to contribute and work together.

  28. Thanks for great post.

    Two quick points:

    1. The expansion of home health care workers, physical therapists, etc is a good thing economically. These are jobs which cannot be outsourced, although sometimes they can be filled by immigrants. Our economy needs jobs like these, to somewhat cushion the negative impact of automation and free trade in the manufacturing sector.

    Frankly, if we had a new WPA (and we should), there would be millions more jobs in home health care and other services for the elderly.
    Some of this is just arithmetic. If we spend $1 million on repaving a road, it employs 5 or 10 workers plus heavy machinery, Whereas $1 million more spent on home health care adds about 30 workers at $33,000 each, not bad for a WPA job.

    2. As for hospitals adding employment, you imply correctly that hospitals still live in a cost-plus world or at least they think they do.

    There was a news item in John Goodman’s blog not long ago about a hospital system that got higher reimbursements from Medicare by changing its headquarters to a city where wages were higher.

    This is a hangover from the days in Medicare when everything was cost-plus. Imagine if a company that makes batteries were to raise its prices to Walmart because it produced the batteries in Manhattan. The Walmart buyers would throw them out on their ear.

    I am not sure that we need a complex restructuring and ACO’s to slow down health care infation. Just having a national fee schedule and tighter limits on balance billing would be a big step forward.

  29. bundling and capitation will help because there are, or ought to be, markedly fewer transactions, and fewer people checking up on clinicians. these consolidated modes of payment only work if there is self-regulation by the clinicians at risk. there is too much transactional density in the current fee based payment model. the transactions just get more and more complex. regulations aren’t the problem; overly complex business rules and the burgeoning “quality metrics” that don’t really measure quality, but proxies for quality. it’s gotten completely out of hand.

    The payers are wasting a fortune on administrative cost trying to hold clinicians micro-accountable, and adding to practice overhead. And the policy community is trying to dictate clinician behavior from a distance by inundating them in “core measures” they have to record in order to get paid.

    It’s a vicious cycle we need to end by changing how we pay for care.
    “Accountable care” missed the point because it was the same core measures cascade all over again, and it overlaid, rather than replaced, all the transactions.

  30. Great post and very interesting figures!

    I would add a few things to your analysis, Jeff. Those newly added “management” positions are probably at least in part due to consolidation. The small private practice seems to still be the most efficient unit of service, but nobody cares enough to measure.

    I do agree that the ever increasing regulations and administrative tasks, and you’d be hard pressed to find a doctor that is not complaining about those, is at the heart of many of the additional jobs, non-clinical and clinical, since clinician productivity is most likely lower due to “paperwork” be it electronic or not. BTW, the reduction in clerical jobs is most likely due to outsourcing and off-shoring, so no real savings there either.

    I’m not sure what is going on in home care and long term facilities, but shouldn’t we expect that if acute care is reduced, than the wack-a-mole will pop up in those other areas?

    I guess I also don’t understand why bundling or capitating would be beneficial if administrative costs are driving payroll up. They can’t get rid of regulations, so if the payments are fixed, wouldn’t actual care be the most likely candidate for reduction?